Treasurys Rise After Jobless Claims Jump
(12-20) 14:49 PST New York (AP) —
Treasury prices closed higher Thursday, driven up by new signs of shakiness in the economy and worries that escalating pressures on bond insurers will further undermine fragile credit markets.
Treasurys are viewed as among the safest assets and tend to perform well when the economy is in danger and investors become wary of riskier assets.
The Labor Department reported that initial jobless claims rose 12,000 to 346,000 in the latest week. The four-week moving average of claims, which economists consider a good barometer of the economy, rose 23,000 to 2.63 million, marking the highest level in almost two years.
“The combination of falling consumer confidence and rising jobless claims is a terrible one for the economy,” said Tony Crescenzi, fixed-income analyst at Miller Tabak. “The expansion will end if this continues.”
A regional manufacturing report also raised concern about the health of the economy. The Philadelphia Federal Reserve’s index, which measures factory strength, plunged to a negative 5.7 in December after a positive 8.2 reading in November. The employment subindex dropped sharply to 0.5 from 4.8 last month.
The report followed a weak reading on Monday from the New York Fed on manufacturing in its region.
Meanwhile, the Conference Board said its index of leading indicators dropped 0.4 percent in November to its lowest point since July 2005. Continuing weakness in the index suggests the economy could weaken further this winter.
The benchmark 10-year Treasury note rose 4/32 to 101 26/32 with a yield of 4.02 percent, down from 4.03 percent late Wednesday. Prices and yields move in opposite directions.
The 30-year long bond rose 21/32 to 108 31/32 with a yield of 4.45 percent, down from 4.47 percent late Wednesday.
The 2-year note gained 1/32 to 100 3/32 with a yield of 3.07 percent, down from 3.10 percent late Wednesday.
Some selling in after hours trade pushed yields above their closing levels. At 5:30 p.m. the 10-year yield rose to 4.06 percent, the 30-year yield advanced to 4.49 percent and the 2-year yield increased to 3.10 percent.
The yield on the 3-month note rose to 2.98 percent from 2.90 percent as the discount rate increased to 2.91 percent from 2.84 percent.
The move to safety in Treasurys also was spurred by yet another troubling development involving a bond insurer.
The cost of buying protection against a default for bond insurer MBIA Inc. shot up a full point Thursday after the company said it guaranteed $8.1 billion in collateralized debt obligation market. Collateralized debt obligations, or CDOs, are investment pools that contain some assets backed by subprime mortgages.
Traditionally bond insurers did not provide backing for CDOs, which are among the riskiest debt instruments because of their subprime exposure. Analysts at Morgan Stanley said they were “shocked” that MBIA management withheld the details of its large CDO exposure for a long time.
The disclosure from MBIA came a day after a Standard & Poor’s rating agency slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade “CCC” from investment grade “A.” S&P said ACA’s capital cushion of $650 million is still $2.2 billion short of what it needs to cover potential losses.
Meanwhile, a Commerce Department report showed that the core personal consumption expenditure price index, an inflation gauge carefully monitored by the Federal Reserve, rose at a 2 percent clip in the last quarter. The previous report showed only a 1.8 percent advance. The Fed’s “comfort zone” for inflation increases is 1 percent to 2 percent.
The bond market monitors inflation carefully because it eats into the value of fixed income. In addition, if the Fed becomes excessively worried about inflation it will be more cautious about reducing rates.
And the Federal Reserve said that in the latest week, the total amount of commercial paper outstanding fell by $54.7 billion, the largest weekly decline since late August. The outstanding volume in the risky asset-backed sector contracted by $27.5 billion.
The commercial paper market, normally highly liquid, began contracting sharply in August due to concerns that some of these short-term notes are backed by below-prime mortgages. Commercial paper usually provides an easy way for companies to get short-term operating capital while avoiding formalities such as registering bond sales with the government.
